How to Handle a Platform Scandal: The Impact of Socio-Ethical and Functional Scandals on Seller Participation

Abstract

Digital platforms, as intermediaries connecting sellers and buyers, have become key spaces for transactions and advertising. When these platforms get involved in scandals, sellers are affected by them in two major ways: as businesses on the platform who can be implicated from the buyers' point of view, and as themselves the customers of the platform. In this paper, we examine how sellers on a digital platform react to two distinct types of scandals: one triggered by platform transgressions that are either social, political, or ethical in nature ("socio-ethical"), and the other caused by a failure to the platform's core functionality ("functional"). Using Kickstarter as the empirical context, we analyze the effects of two major scandals: a 2019 unionbusting scandal and a 2021 blockchain pivot scandal. We focus on how sellers responded to these scandals, specifically investigating their decision to participate on the platform following a scandal. The union-busting scandal, driven by socio-ethical concerns, did not affect platform functionality but prompted negative press and backlash, while the blockchain pivot scandal threatened the platform's core functionality. We find that both scandals led to a significant drop in project supply, with active project participation dropping by 7.94% during the union-busting scandal and by 8.57% during the blockchain pivot scandal. While the response to the former scandal was delayed, the response to the latter was more immediate. Additionally, we explore heterogeneity in sellers' response based on factors such as project purpose (fan base cultivation), and creator type (individual vs. large creators). This study provides insights into the diverse reactions of platform participants to scandals, with important implications for platform managers and researchers.

Keywords: Firm scandals, crowdfunding, digital platforms, two-sided markets